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How media and T-Cell acquired the higher of AT&T and Verizon

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With the inventory market in a deep funk (and getting funkier by the day) buyers are searching for protected locations to park their cash, like shares that pay wholesome dividends. Which might be telecom shares, proper?

Perhaps not.

The reality is that telecom shares — there are actually solely three biggies as of late; AT&T (T), Verizon (VZ) and T-Cell (TMUS) — aren’t what they was once. Some say that has to do with their disastrous forays into the world of media, however it’s in all probability extra a matter of failed execution and the maturation of the enterprise.

First the media math. Keep in mind that inside a two-week interval in Might of final yr, each AT&T and Verizon jettisoned WarnerMedia and Yahoo, their respective content material properties, (sure, the latter owns my employer, Yahoo Finance). These strikes have been made to rid the data-driven, left-brain telcos of frivolous, flowery — by no means thoughts expensive — media companies. Getting out of content material, the considering went, would permit the phone firms’ distribution companies to run full-out and unfettered, which might presumably be a boon to shareholders.

“My days are a bit of bit extra predictable than they have been a few years in the past,” AT&T CEO John Stankey told Yahoo Finance’s Brian Sozzi this week. “That is one of many the explanation why we made the choice to do what we’re doing. I did not suppose I might do my finest work or the broader administration crew might do their finest work if we have been attempting to struggle too many battles on too many alternative fronts. We’re a extra centered firm immediately. We’re executing every week higher than we have been the week earlier than, however we nonetheless have room to go.”

John Stankey speaks onstage at HBO Max WarnerMedia Investor Day Presentation at Warner Bros. Studios on October 29, 2019 in Burbank, California. (Picture by Presley Ann/Getty Pictures for WarnerMedia)

For positive on that final level.

Since Might 15, 2021, roughly when these bulletins have been made, Verizon’s inventory is down 18% and AT&T is down 19%. The S&P is just off 4%. The shares nonetheless underperform the market after factoring of their 6% plus dividend yields.

Maybe that’s shocking given these firms made game-changing bulletins — significantly within the case of AT&T, as its divestment of content material was a a lot larger transfer relative to the dimensions of its general enterprise. It’s additionally shocking since each AT&T and Verizon shares sport beneficiant dividend yields, which ideally would bolster the shares throughout a market downturn.

Did deep-sixing the content material companies assist the telcos’ shares? No, it didn’t.

Earlier than we get extra into that, let’s first think about T-Cell, as soon as ridiculed (and nonetheless loathed) by the Large Two, for its over-the-top former CEO, John Legere, and its garish (but efficient) pink branding. Legere stepped down two years in the past, however, guess what, T-Cell is now ascendent if not triumphant. Barron’s recently pointed out that T-Cell has a much bigger market cap ($177 billion) than Verizon ($173 billion) or AT&T ($119 billion). True, each Verizon and AT&T are extra leveraged, in order that the general enterprise worth of the 2 older firms is greater. However the reality stays that T-Cell inventory has trounced Verizon and AT&T — and the market — over the previous 5 years.

T-Mobile US Inc Chief Executive Officer John Legere arrives at Manhattan Federal Court during the T-Mobile/Sprint federal case in New York, U.S., December12, 2019.  REUTERS/Shannon Stapleton

John Legere arrives at Manhattan Federal Courtroom in the course of the T-Cell/Dash federal case in New York, U.S., December12, 2019. REUTERS/Shannon Stapleton

Why is that? In a phrase, execution. T-Cell merged with Dash, priced aggressively to construct market share, and most significantly, improved its community.

“TMUS 5g community might be 18 months forward of AT&T and Verizon’s, if not a bit of extra,” says Keith Snyder, an business analyst at CFRA. “[AT&T’s and Verizon’s] stability sheets are unhealthy. These two firms mixed have about $300 billion that they should get off their stability sheet in some unspecified time in the future. In the meantime, they should spend very closely on community deployments and new spectrum.”

And one other factor: “Verizon’s inventory value is decrease than it was 20 years in the past. AT&T’s inventory value is decrease than it was 20 years in the past,” says veteran business analyst Craig Moffett. “Granted, they’ve paid dividends, however the complete return by proudly owning these shares has been lower than what you’ll have gotten from a company bond.”

Somebody’s made cash right here, although. As this 2017 McKinsey report factors out, web giants Amazon, Google and Fb have constructed up huge companies on the networks of AT&T and Verizon. The mixed market caps of these three tech giants — $3 trillion — is 6.4 instances that of the three telcos’ $469 billion.

So did AT&T and Verizon blow it by not with the ability to marry content material with distribution? Moffett thinks that’s a crimson herring.

“I am undecided ‘the tug and sway between content material and distribution’ has ever been a very related thesis,” Moffett says. “It is a kind of issues that folks like to speak about, however it does not actually have all that a lot real-world utility. Partially the issue with attempting to be vertically built-in is that the regulation frowns on it. So there’s limitations on what you possibly can do. You would theoretically make content material unique and that form of factor, however as carriers you usually aren’t allowed to do this. So there is not actually any specific strategic logic for being vertically built-in.”

To Moffett it’s extra a matter of two firms with declining companies and bloated stability sheets that can wrestle to pay their dividend down the highway. AT&T already minimize its dividend as a part of its divestiture of the media enterprise earlier this yr.

As for the businesses’ path ahead: “They are not going to go bankrupt,” Snyder says. “They’re established, their companies are producing money. It is simply that they should rethink what they’re doing.” Moffett gives a extra succinct prognosis: “It is horrible.”

However, each analysts are sanguine about T-Cell, which they are saying will proceed to develop on the incumbents’ expense.

Is there any optimism available AT&T or Verizon? “The bull case for Verizon or AT&T is that expectations are so low that the shares have nowhere to go however up,” Moffett says. “And so long as they preserve the dividend, that thesis might maybe work.” However then he provides: “The issue is, as we have seen so usually with these firms, if they can not generate any development, then the sustainability of the dividend finally is doubtful.”

For Verizon and AT&T, it’s not an ideal place to be in. Seems even huge splashy media offers could not assist them.

This text was featured in a Saturday version of the Morning Transient on Saturday, September 17. Get the Morning Transient despatched on to your inbox each Monday to Friday by 6:30 a.m. ET. Subscribe

Observe Andy Serwer, editor-in-chief of Yahoo Finance, on Twitter: @serwer

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